In the Federated Hermes 2023 Outlook, Federated Hermes chief executive Saker Nusseibeh said the ESG landscape has become muddled.
“It has been a rough year for ESG, with politics and a wide misunderstanding of what it is and what it means in the context of investing, playing their part to muddle the landscape,” Mr Nusseibeh said.
The investment manager’s head of responsibility, Leon Kamhi, added that confusion around ESG is growing and resulting in a tougher regulatory environment.
“It is odd that having entered the investment industry’s lexicon all the way back in 2006 with the launch of the Principles of Responsible Investment (PRI), it feels like ESG was never more misunderstood than in the year that passed,” Mr Kamhi said.
“Further, the weaponisation of ESG by both its promoters and detractors for commercial or political purposes went to new levels, and views on ESG became highly polarised. In the meantime, well-intentioned regulators seeking to protect investors and get a grip on greenwashing have likely added to the turmoil with unclear and significantly burdensome requirements which are unlikely to help develop a sustainable economy.”
While Mr Kamhi said the coming year would bring more of the same, it is not all doom and gloom.
“An alternative outlook would be to see investment responsibly working to support the creation of wealth for investors sustainably. Investment with a laser focus on the interests of investors and undistracted by political aims or virtue signalling,” he said.
“Firstly, ESG to be seen for what it is, three distinct categories of performance drivers which historically were too often ignored in investment decision-making. To achieve any investment mandate’s risk and return objectives, the material factors need to be considered.
“Secondly, that in secondary markets it is the improvement of performance of the key economic drivers, including relevant ESG considerations, that matter to the wealth of the investor, not the existing quality of what is invested in.”
Mr Kamhi added that investment management can support this through effective stewardship: “This form of ESG investing is distinct from investing in high ESG performing investments in line with a set of values rather than for the creation of value.”
“Thirdly, that the focus of regulation of responsible investment moves away from simply capturing ‘sustainable’ secondary investments to be what is already green. Instead, regulation should properly recognise the role which stewardship plays in delivering sustainable outcomes and the enhancement of an investment’s performance,” he concluded.
